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Index Wrap

Philadelphia Fed showed latest improvement

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Despite negative reactions to earnings from IBM (NYSE:IBM) $89.28 -3.7% and Caterpillar (NYSE:CAT) $74.33 -5.3%, where IBM and CAT hold the second and fourth-most weighting in the price weighted Dow Industrials (INDU) 9,791.72 -0.11%, the blue chip Dow battled back to lose just 11 points by the close and find other major indices finishing with gains.

The major indices found their lows of the session early, and the 12:00 PM EDT release of the regional Philadelphia Fed survey, which showed further sign of economic improvement building in September, helped echo some of this morning's September industrial production data, which showed the nations output rising 0.4% in the same month.

While it would be difficult to disregard negative reactions to two of the world's dominant players in their respective computer and heavy equipment industries, the major indices held tough after the opening bell, with the sessions lows being found in the first hour of trade.

As hard as I might try to update some of the daily earnings reports, it is exhaustive and often times confusing when earnings are being reported as pro-forma and generally accepted accounting principles (GAAP). Sometimes analysts are basing their predictions off of pro-forma, while other analysts polled for consensus are using GAAP.

While I'm not an active number cruncher, CNBC reported that it had talked with polling firm Zacks and so far for Q3, of the companies reporting, revenues (top line growth) were up 8% on average, while earnings are up 18% (bottom line growth). An honorable mention was made that going forward, Q4 estimates were trending higher each day with the average guidance growing the bottom line by 22%.

The rather notable discrepancy in growth rates from top and bottom line really show just how much fat has been trimmed in operations, and has bulls so optimistic for the future should the economy really heat up.

Yesterday, Reuters reported that earlier this month, CEOs surveyed by the Business Roundtable expected gross domestic product growth of around 3.3% for the fourth quarter, which was up from 2.3% they had forecasted in July.

I don't know if you read the intra-day updates, but I saw and posted (11:00 AM Intra-day) some of today's reports out of China where industrial production for September rose 16.3% versus a year ago. While this year-over-year rise is impressive, the World Bank said today that it was keeping its 2003 GDP forecast at 5% for China. There was an educational/informative article on China's economy in today's Asia Times. Did you know that China was also experiencing a jobless recovery? Here's an article discussing China's GDP and unemployment situation at the following link. It might be a good read to go along with this past weekend's Ask the Analyst column regarding various investment opportunities in China. http://www.atimes.com/atimes/China/EJ17Ad01.html

The MSCI Hong Kong iShares (AMEX:EWH) $10.15 +0.39% rose 4 cents in today's trade.

Before we cover the pivot matrix and today's trade in the major indices, when I was writing last night's wrap title "Priced to Perfection?" I swear that the wrap title I came up with was based on my own feeling/observation. Maybe it was subliminal and had been mentioned as a phrase on CNBC yesterday, but it was often reiterated today.

If we think about it, today was almost an exact opposite trade as yesterday. Yesterday, Intel (NASDAQ:INTC) $32.23 +1.47% jumped higher early, with its earnings providing the morning catalyst for the indices to gap higher, to then fall fractionally by the close. Today, it was IBM and CAT to provide the early catalyst for the gap lower, but by the close, find the major indices back higher.

It is almost as if market participants see something added here (in the form of gains), so they take away there (which results in a loss). Then today, there's some take away in IBM and CAT, but it gets added back elsewhere and leaves the major indices relatively unchanged. Almost as if things are being priced to perfection and a point of equilibrium.

It is perhaps this feeling, that I thought today's afternoon rally was a good opportunity for bulls to take some chips off the table. We discussed this possibility, or opportunity in last night's wrap when we covered the QQQs. All be darned if the Qs didn't print a morning low of $35.06 and session high of $35.52, at least from my review of the intra-day bars. There were some bad ticks at $35.00 and $35.53, and I try my best to check some of the intra-day charts on the DIA/SPY and QQQ to try and remove as many errant ticks as possible.

Here's a quick look at tomorrow's pivot matrix. Remember, that we have an option expiration tomorrow and will get new WEEKLY levels after tomorrow's trade.

Pivot Analysis Matrix

I've dashed green tentative early support at the DAILY Pivot and WEEKLY R1, while levels in solid green or red were not traded in today's sessions, and where correlations can be found.

When making an intra-day suggestion for bulls to book some gains on the intra-day rally back near WEEKLY R1s, I checked both the S&P Banks Index (BIX.X) 324.01 +0.12% and the Dow Jones Home Construction Index (DJUSHB) to see what they were doing, but also checked some of the intra-day breadth indication for leadership in the NYSE and NASDAQ new highs and new lows and I just had the sense that it might be a good idea to lock in some gains, especially with some of the work we did in last night's wrap.

I must say the intra-day reversal for Treasuries from buying to selling on the Philadelphia Fed report had one of those reactions from the bond market that would come from strong economic data.

The early buying in bonds was a bit surprising after seeing the September core CPI jump 1.2%, and I would have to believe the early bid in Treasuries was simply a defensive reaction to IBM and CAT, or the bond market really doesn't sense an alarming trend toward inflation at the consumer level.

By session's end however, the higher YIELD action in Treasuries did mimic the AMEX Gold Bugs Index ($HUI.X) 206.20 +2.29% as if some inflation that would come from economic growth might become a factor in the months ahead.

I would also have to admit that I'm not a big fan of option expiration, and one reason I felt compelled to take profits in today's late afternoon rally for the indices, was that some subscribers might hold some decent gains from the past couple of weeks, and I've just seen some crazy things take place on an option expiration Friday. While October expiration isn't as big of an expiration as a quarterly expiration might be, I don't think there's anything wrong with taking profits so close to a high, sitting things out for an expiration, just in case any downside volatility would shake a ready-to-close-out-anyway bull.

Here's a look at the S&P 500 Index (SPX.X) 1,050.07 +0.31%, which closed just a smidge back above its WEEKLY R1.

S&P 500 Index (SPX.X) - Daily Interval

A 1,050 October settlement? Maybe. A volatile session with swings from 1,040-1,060? Maybe. I could lay out scenarios for both. Stochastics certainly give the impression that some type of consolidation or pullback is due, while MACD still trending higher still gives cause for bullishness to the MONTYLY and WEEKLY R2s.

You and I know that MACD would only turn lower should the SPX decline, and Stochs in a trending security (index or stock) aren't as reliable as the are in a sideways type of trade.

There's nothing bearish I can see in the SPX.X, and only thing negative I could alert a bull to was that the Securities Broker/Dealer Index (XBD.X) 646.52 -0.46% had a financial sector trading in negative territory all day, while the S&P Banks Index (BIX.X) has been trading between 323 and 326 for three sessions now after expending some energy in a bullish move from 305 just 12 sessions ago. I wouldn't say the consolidation in the BIX.X is bearish, but looks to be losing some of its bullish momentum.

This lack of bullish momentum may have also been seen in today's NH/NL NASDAQ and NYSE readings, which I discussed in today's 03:15 PM EDT update. As a closing note to those internals, the NYSE finished the day by recording 297 new highs and 9 new lows, while the NASDAQ showed 267 new highs and 5 new lows. Neither ending tally had any noticeable impact on the 5-day or 10-day average ratios from the 02:00 PM EDT readings.

Today's trade saw the S&P 500 Bullish % ($BPSPX) slipping back 0.2%, so 1 stock would have given a reversing back lower point and figure sell signal. Still "bull confirmed" at 81%.

S&P 100 Index (OEX) Chart - Daily Interval

If I were the market, what would I be doing with the OEX? I'd have to say I'd be looking for a pullback entry points, back near 513.

I was flipping through my Stock Trader's Almanac tonight and saw that on September 30th, the Almanac note was to start looking for some seasonally bullish MACD signals. All be darned if it wasn't that next day that the OEX jumped above the now MONTHLY pivot.

I also made note that after last month's expiration, the OEX showed relative highs near 522 on Thursday and Friday, then pulled back the following week. That combined with Stochastics just sitting here has me (Jeff Bailey) a little more protective toward bullish gains.

Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX). Still "bull correction" status at 79%.

A neat note for next week, that is more stock specific, is for technology bulls to look for some depressed technology stocks. The "top of mind" stock I can think of is Sun Microsystems (NASDAQ:SUNW) $3.63 -4.29%, which slipped to $3.54 in extended hours after reporting quarterly earnings. No surprises tonight after SUNW warned on this quarter's earnings back on September 29th. If looking for a depressed tech stock in the NASDAQ-100 Index (NDX.X) 1,426 +0.65%, which closed at a 52-week high today, then SUNW would certainly fit that profile.

In October of last year, the QQQ was trading $20.00. Today it closed at a 52-week high of $35.46. In October of last year, SUNW was trading $2.50 and today is close at $3.63.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

I'll raise my right hand and swear that I had my head in the sand when I profiled a day trade short in the QQQ at $35.15, target $35.01 and stop $35.22 ahead of today's Philly Fed report, but a bad tick at $35.00 (which I corrected in the above chart's O,H,L,T) daily snapshot bar had that bearish day trade getting stopped out in rather quick fashion.

Where the heck was the selling on the IBM earnings disappointment in the tech-heavy QQQ? Bugger couldn't break either the mid- point of regression, or our 38.2% retracement from the WEEKLY pivot retracement. This was something discussed in last night's wrap, and I wouldn't feel overly bad if a bull sold some strength on the Philly Fed report, as the QQQ rallied right back to its WEEKLY R1.

At the far left of the chart, and it is hard to see, I do see some similar oscillator setup where the QQQ's Stochastics were dancing around the "overbought" level while MACD was trending higher. The QQQ slipped lower for about 2 sessions, then bounced back to challenge the prior high. This might match similar oscillator setups, where I'd look for pullback support between $34.25 and $34.46. I'll make note of this tonight, and will look for similar levels with next week's WEEKLY pivot analysis.

I haven't looked at eBay's (NASDAQ:EBAY) $57.50 -0.17% earnings report, but the after-hours reaction has the stock at $53.84 and right back into this summer's consolidation. The QQQ's last tick was at $35.35 in late session trade.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and status remains "bear correction" at 79%.

Dow Industrials (INDU) Chart - Daily Interval

Dow breadth finished the day positive at 24 to 6, and its 11- point loss was largely attributed to IBM -3.75 and CAT -5.13%. HPQ $21.27 -2.9% did see negative sympathy with IBM, but HPQ has struggled with quarterly earnings, especially matching top line estimates.

In PINK, I've marked a similar oscillator setup as we perhaps see today, where an eyeball approach to a trade scenario is that the INDU might still have some upside potential to WEEKLY R2 of 9,892, then see a pullback into the 9,600 area, and a bounce back higher yet again.

Today's trade saw no net change in the Dow Industrials Bullish % ($BPIND) and status remains "bull correction" at 83.33%.

Jeff Bailey

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